U.S. Fund Managers Will Have to Meet E.U. ESG Rules

To do business in Europe, U.S. fund managers will have to comply with broad new European rules on climate and other sustainable issues, disclosing potential harmful investments could make an impact on the environment and society.

Fund providers like Vanguard Group, BlackRock Inc. and State Street Corp. that offer investment products in the European Union will have to follow the new rules that took effect this month, but details are still being finalized, the Wall Street Journal reports.

“There are many issues to be resolved, it is causing anxiety,” Rick Lacaille, global lead for environmental, social, and governance investing at State Street Global Advisors, told the WSJ.

As interest for ESG-related investments gains momentum, standardized rules on disclosure for traditional funds and those following sustainable strategies will become increasingly important.

While the European Union has already pushed for more scrutiny on ESG criteria, the Biden administration is still forming a rough outline on how to approach a similar rule set. The Securities and Exchange Commission has just started focusing on climate-related disclosures by companies. Consequently, investors shouldn’t expect any big changes to take place for years. Looking ahead, we may expect companies to disclose information about diversity, carbon emissions, and worker pay, among others.

“The big unknown is…how established these standards become beyond Europe,” Andy Pettit, European policy research director at Morningstar, told the WSJ.

So far, the industry in the U.S. has been disclosing ESG factors through a voluntary honor system. Many countries, including the U.S., aren’t required to report ESG data. Only about one-third of S&P 500 companies provided diversity information in annual reports for 2020.

Europe’s latest Sustainable Finance Disclosure Regulation, on the other hand, requires banks, private-equity firms, pension funds, hedge funds, and other asset managers to meet specific ESG requirements. The rules apply to all funds, even if they don’t sell sustainable investing goals.

Some fund managers, though, are wary that the rules may be too stringent. For example, funds will be required to disclose information on companies, including data that the companies may not even reveal to the public.

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